The Monetary Policy Committee (MPC) is expected to keep the policy repo rate on hold at its upcoming meeting, scheduled from February 6 to 8, as retail inflation remains volatile and continues to be above its comfort level, according to economists.

The “to remain focused on withdrawal of accommodation” stance too is unlikely to be changed as the monetary policy continues to be in disinflationary mode.

The rate-setting six-member MPC has kept the policy repo rate unchanged at 6.50 per cent in its last five bi-monthly meetings.

The last time this rate (at which banks borrow funds from RBI to overcome short-term liquidity mismatches) was upped was on February 8, 2023. The rate then was hiked from 6.25 per cent to 6.50 per cent.

“We expect the MPC to keep the repo rate on hold at 6.5 per cent. We expect the committee to maintain the monetary policy stance pointed towards a “withdrawal of accommodation” despite deficit liquidity conditions, but the communication is likely to turn materially less hawkish.

“In our view, there is also a non-negligible possibility of the stance being changed to neutral, but it is not our base case,” said Rahul Bajoria, MD and Head of EM Asia (ex-China) Economics, Barclays.

While headline inflation remains elevated, it is more due to volatile perishable food prices.

Bajoria opined that the MPC will take significant comfort from declining core inflation, which has moderated to a near four-year low  (3.8 per cent in December), suggesting little sign of overheating from demand-pull pressures. 

Food price shocks

Referring to RBI’s view that food shocks can have second order effects that impede attaining policy goals, YES Bank’s Chief Economist Indranil Pan said, “We believe that the RBI is unlikely to pivot soon – both on the rates as also on the stance of monetary policy. Our model predicts for an inflation print of sub-4 per cent in July and August 2024, but this is heavily conditioned by the high base from the previous year.”

In his December 2023 monetary policy statement, RBI Governor Shaktikanta Das had observed that, “The overall inflation outlook is expected to be clouded by volatile and uncertain food prices and intermittent weather shocks…. We have to remain highly alert to any signs of generalisation of price impulses that may derail the ongoing process of disinflation.”

He had then underscored that the projected inflation (4.7 per cent) in Q3 of next year -- one year from now, is perilously close to 5 per cent.

“In these circumstances, monetary policy has to be actively disinflationary. Any shift in policy stance now would be premature and risky. Further, with past rate hikes still working through the economy, it would be desirable to closely monitor their full play out. The conditions ahead could be fickle and call for prudent evaluation of the emerging situation.” Das had said.

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